Looking under the hood of smartphone sub-brands

Apr 22, 2019 by Moulishree Srivastava

Xiaomi founder Lei Jun’s India team upstaged OnePlus 6T’s launch event in New Delhi last year by distributing free calculators to the gathering. The idea was to make people see the significant Rs 17,000 price difference between OnePlus 6T and Poco F1 - Xiaomi’s sub-brand model launched two months ahead of the 6T roll-out - despite having similar features.

Xiaomi claimed, five minutes into the launch, Poco F1 grossed Rs 2 billion plus in total sales. The sub-brand was pitted against Samsung and OnePlus in the mid-to-premium market.

With mobile penetration on the rise, the Chinese smartphone manufacturers are launching sub-brands to attract the young demographic in metros and smaller cities. The sub-brands also help smartphone companies to build a new image and create excitement around the brand.

India has around 400 million smartphone users. The country has a population of 1.35 billion, which leaves around 600-700 million without smartphones (excluding children). India, analysts say, has a lot of potential compared to the US, a premium smartphone market, and China, where the market has already matured.

Xiaomi gatecrashing OnePlus’ launch event is a sign of things to come. Xiaomi, Oppo and Huawei are slugging it out in the sub-brand segment for a larger pie in the world’s second largest smartphone market. The battle lines are drawn.

In May 2018, Oppo launched its sub-brand RealMe to take on Xiaomi’s Redmi in the budget segment.

According to the Counterpoint Research, RealMe captured 1% of the Indian smartphone market within a month of its debut. Oppo’s overall market share shot up to 10% in the second quarter of 2018 from 5.6% in the previous quarter. Almost single-handedly, RealMe slashed Xiaomi’s market share from 31.1% to 28%.

Post Poco launch, Xiaomi managed to arrest the free fall in market share. By the year-end, Oppo and RealMe together held 15% of overall smartphone market share, while Xiaomi's market share remained stuck at 27%.

In January, Xiaomi Group announced Redmi would operate as an independent brand to maintain its leadership position in the market. The Chinese brand also set up a team to focus solely on Redmi devices.

According to multiple industry sources, Oppo is expected to bring Reno—another sub-brand unveiled in Shanghai in the second week of April—to India. Oppo’s sister concern, Vivo, is also likely to bring its gaming brand, iQOO (launched in China in March), here. However, the company hasn’t made any official announcement yet.

Online renaissance

Before Xiaomi’s inception in 2010, smartphone sales predominantly happened offline in China. In three to four years, Xiaomi's internet phones took China by storm. That's when the device makers adopted sub-branding for the first time. In 2013, Huawei launched Honor to replicate Xiaomi’s online success. Same year, OnePlus was set up as the online-only sub-brand of Oppo by its former employees Pete Lau and Carl Pei.

“OnePlus was born because of Xiaomi, and Honor was born because of Redmi,” said a former Oppo employee on condition of anonymity. Chinese MNC BBK Electronics owns Oppo and Vivo.

“Five years ago in China, Xiaomi was a phenomenal company. No one had ever imagined a company like Xiaomi could create online-only, quality yet affordable smartphone brand,” he said over a call from Hong Kong. “In the market, there were hundreds of brands learning from Xiaomi, but only a few brands like OnePlus and Honor succeeded.”

After OnePlus took off and became an almost separate entity, Oppo brought RealMe to target online customers.

“Each brand is learning from other brands’ successful ways,” said the former Oppo employee quoted above. “While Oppo and Vivo learn from Xiaomi, the latter is learning from Huawei. Now, Xiaomi is taking offline distribution channel seriously like its rivals.”

Meanwhile, Samsung, which saw a 6 percentage-point drop in its India market share in 2018, is not too keen on launching sub-brands, unlike its Chinese counterparts.

““This fuels internal competition. This is very Chinese. If you look at Alibaba and Tencent, they learn really fast. You may not get a revolutionary innovation in every product, but regular small updates to help you grow.”

Vikas Agarwal, the general manager, OnePlus India, said sub-brands are a good risk management strategy. “You don’t need to put all the eggs in one basket. It’s a good approach because if it doesn’t work, you can move on.”

Positioning dilemma

Xiaomi, Oppo and Vivo succeeded in India largely due to their segment-focused approach. However, the same tack didn’t work out across the segments.

For instance, over the last four years, Xiaomi established itself as an affordable brand with Redmi and Mi series in the sub-USD 250 category. Meanwhile, Oppo and Vivo, nestled themselves comfortably in mid-market - premium segment in the USD 250 to USD 700 range.

“When Xiaomi entered India, they had to be price competitive to establish themselves. So they offered more features at a lesser price,” said Jayanth Kolla, founder and partner at Convergence Catalyst, a Bangalore-based research firm.

“Unfortunately, once they got a decent market share, their brand association became that of an entry-to-mid segment brand.” Interestingly, the market share of Xiaomi dropped last year.

“That’s the problem all the smart companies face once they are in a market for three to four years,” said Satish Meena, analyst at Forrester. “In the last five years, Xiaomi users have grown. A customer using Redmi phone for few years would want to try a better phone.”

Since Xiaomi can’t make Redmi a premium segment phone, users would go to either OnePlus or Oppo.

If Xiaomi were to enter Rs 50,000 plus category, it wouldn’t have many takers because of its affordable-brand image, said Navkendar Singh, research director at IDC India.

Poco was birthed to fill the gap in Xiaomi’s product line and to tap the existing smartphone users looking for a premium upgrade.

“Poco wanted to do with OnePlus what OnePlus did with other luxury brands,” said Faisal Kawoosa, founder and chief analyst at research firm Techarc. OnePlus brought Rs 30,000-40,000 smartphones as an alternative to Rs 80,000 plus high-end Samsung and Apple devices. Meanwhile, Poco offered Rs 20,000 range device against OnePlus.

Poco F1 is a high-performance device equipped with Qualcomm Snapdragon 845 processor and liquid cooling technology with almost two-day battery life. But to make it cost-effective, Xiaomi sacrificed screen quality, telephoto lens, NFC and GPS positioning, among other things. At the same time, Oppo is chasing the budget segment after solidifying its position as a premium brand.

“Oppo has realised there are only a limited number of customers who are willing to pay for premium phones,” Meena said. “They wanted to address the bigger budget market by cutting down on the prices and features.

“The company couldn’t do that with its existing Oppo models because that would have cannibalised the existing brand and hurt its premium image. So it created RealMe,” he added.

The image game

On the surface, smartphone makers like to keep sub-brands as separate entities and set up different teams for development, marketing and promotions. Behind the scenes, however, sub-brands share resources such as R&D, designing and manufacturing with the parent brand.

“The efficiency in local manufacturing helped the companies to bring spec-heavy smartphones at lower prices in the market,” said Anshika Jain, research analyst, Counterpoint Research.

Simply put, sub-brands are helping companies manage perception in users’ minds. For instance, being a premium brand, Oppo does not want to imply it is competing with Xiaomi. Oppo has RealMe for that.

While sub-branding help smartphone companies differentiate offerings, lack of innovation has turned these devices into a me-too–product.

“There is not much significant innovation happening on the device side. Companies are just increasing the number and the quality of cameras,” said Meena. “It will take at least two more years before the foldable devices become affordable.”

“It is just 5-10% incremental value for the customers looking to upgrade, so replacement cycles are increasing,” he said. “These sub-brands are meant to create excitement in the market.”

According to Suhail Tariq, CMO, Honor India, it all comes to diversity. “You can’t create a sub-brand by launching a different smartphone. Honor has a huge portfolio of devices catering to different users’ needs. And that’s how a brand is built.”

Sweat and toil

Launching a sub-brand is easier said than done. It takes sustained investment to make a brand a success. In the past, Micromax’s online-only brand Yu and Lava’s Zolo failed due to poor product quality and lack of investment.

“Setting up a new brand comes with a cost. You have to have a separate investment and go-to-market strategy, and you have to manage portfolio quite well,” said Counterpoint’s Jain.

Kolla said setting up too many brands may dilute the company’s resources.

“Now that Redmi and Xiaomi are operating separately already, I think Xiaomi will not have enough resources to support Poco,” said the former Oppo executive quoted above.

While Chinese smartphone companies are investing in new brands, profit margins are swindling. According to industry estimates, budget smartphones have a profit margin in the range of 5-6% whereas mid-market phones fetch 10-15%.

“The cost of inputs has gone up and margins can't be pushed due to cut-throat competition. Also, sales is moving back offline. So brands have to also accommodate channel costs,” said Kawoosa. “Thus, the profit margins are hit by 13-15%.”

The success of Chinese brands in the Indian market hinges on the sales volume.

“The market is very competitive and you don’t get much money from devices in India, at least in the short term,” said IDC’s Singh. “But smartphone companies do not have a choice.”

“If they do not establish themselves here now, the cost of not investing in two to three years will be losing out on India market,” Singh added.

But even in India, the pace at which new smartphone users are growing is slower than expected, analysts said, adding that the replacement cycles are becoming longer. Smartphones firms would need to snatch users from their rivals in order to grow.

“The market share growth is limited, even in India. So everyone has to put more resources, and work much harder,” said the ex-Oppo official. “Right now, the only good news is that the Indian phone market is still growing.”

Though Samsung and Xiaomi have maintained their superior positions, there is no clear cut winner.

“In the Indian smartphone market, nothing is settled right now. This indicates that there is still room for experiment and acceptability,” said Kawoosa.

Moulishree Srivastava

Moulishree Srivastava is a Bangalore-based tech journalist. She focuses on emerging Indian startups and unicorns. She can be reached at moulishree@thepassage.cc.